Analytics and Risk Management: Tools for Making Better Decisions

Analytics and Risk Management: Tools for Making Better Decisions

The Spring 2010 Forum in The Business of Government magazine explores analytics and enterprise risk management.

Decisions based on bad information can lead to poor results and be quite costly to organizations.This may culminate in the squandering of opportunities, taking on unnecessary risk, misallocating resources, and ultimately not achieving strategic goals or objectives. At a time of shrinking budgets and increasing expectations to do more with less, making better decisions based on informed judgment has taken on even more significance for both private sector and government organizations. In a world inundated with all kinds of information, timely, relevant, and more predictive data can drive better decision making. The forum in our latest The Business of Government magazine explores the usefulness of two tools—analytics and risk management—that can, when employed at an enterprise level, assist government agencies in strengthening their decision-making capabilities and, in turn, improve their overall performance.

Tom Davenport, distinguished professor in information technology and management at Babson College, kicks off this forum with an in-depth conversation on the strategic importance of analytics, how government can leverage analytics, and ways to improve decision making using analytics. Davenport points out that analytics and fact-based decision making can have as powerful an effect on the achievement of governmental missions as they can on the accomplishment of corporate business objectives. “Analytics,” says professor Davenport, “is the extensive use of data, statistical and quantitative analysis, explanatory and predictive models, and fact-based management to drive decisions and actions.” Analytics uses data—structured and unstructured—to uncover patterns, identify opportunities, seek parallels, formulate predictions, and inform decisions. It has the potential to transform information into insights—taking diverse volumes of data and predicting the most likely outcomes of key decisions or events.

These insights can make a real difference and enhance an organization’s performance. From doctors managing treatment better, to the Social Security Administration adjudicating disability claims more quickly and accurately, or to tax collection agencies ferreting out fraud, success is all about turning analytics into action. “Analytics,” explains Davenport, “starts to give you an idea of why something happened, which is always useful, and then, once you have a model that [helps you understand] the past, you can start to predict the future, and that’s incredibly useful.” All this rests on having access to quality data, robust algorithms, sufficient computation power, and strong leadership. it is this capacity to predict trends, anticipate events, and identify risks that makes analytics a potentially valuable tool for today’s government leaders. The Obama administration’s emphasis on transparency and accountability provides the promise of analytics with an opportunity to make a real difference.

It is this emphasis on accountability and transparency that has also prompted a renewed focus on risk and controls. Enterprise Risk Management (ERM) is the second tool explored in this forum. While analytics is the extensive use of data, statistical and quantitative analysis, explanatory and predictive models, and fact-based management to drive decisions and actions, ERM also rests on taking data seriously in order to analyze potential risk and make informed judgments. In many ways, it can enable organizations to meet their missions while avoiding hazards and mitigating loss. ERM focuses on potential events and their classification into opportunities and risks. It’s about balancing risk and opportunities; that requires an organization to go beyond simple regulatory compliance and embed this discipline into its organizational strategy, governance, and culture.

The forum provides three distinct yet complementary perspectives on the importance of strategic enterprise risk management. Karen Hardy introduces the concept of ERM. Professor James Bailey focuses on managing risks by strengthening the financial control and integrity. David Schanzer and Joe Eyerman explore how the federal government can enhance its capability to use strategic risk management in safeguarding the nation. This forum highlights possibilities; it explores two powerful tools—analytics and enterprise risk management—that can strengthen decision making and, in turn, improve organizational performance.